Message in a battle

The race to redefine cross-border finance

SWIFT enabled a surge in global payments over the decades. Now it faces
threats from challengers—and is fighting back

In 1977 a string of 12 characters ushered in a new age of global finance. Until then a
bank wiring money abroad needed to relay up to ten instructions on public phone
lines, which were then typed into forms, taking time and causing errors. Then
payments began to be facilitated by a code and secure network created by the Society
for Worldwide Interbank Financial Telecommunications (swift), a club of 500-odd
banks. A surge in global trade and investment followed. More than $140trn has been
transmitted across borders in the past year, equivalent to 152% of global gdp.
Analysts reckon about 90% of that went through swift. Its 11,000 members in 200
countries ping each other 42m times a day.

Now swift confronts another financial revolution. Customers want faster payments.

Fintechs, banks and governments are vying to rival the network. Facebook is
muscling in: on October 19th it began a trial of its digital-currency wallet. swift, for
its part, is fighting back. On October 14th it said 100 banks had signed up to swift Go,
its high-speed transfer service. It is seeking to link instant-payment networks across
countries, in order to make transfers seamless. Whoever wins the race to redefine
cross-border payments will determine the future shape of the financial system—and
who holds sway over it.

The system of correspondent banking through which cross-border payments flow

works like air transport: when two faraway banks do not have a direct relationship,
money travelling from one to the other stops over at banks in between. swift provides
the radio signal directing the money. The Belgium-based network, which is owned by
its members, provides the standards and services that allow firms to exchange
information on transactions.

In recent years, however, swift has faced three criticisms. One is that it is

technologically backward, making transfers slow and costly. Here the problem lies
with correspondent banking, not swift. Time differences and banks’ limited opening
hours hold back processing. Checks have intensified along with the fight against dirty
money, adding to costs and delays.

Security is another concern. In 2016 North Korean hackers stole the swift 

credentials for the Central Bank of Bangladesh’s account at the New York Federal
Reserve and sent transfer requests to various banks. Most were blocked, but $81m
slipped through. A third gripe is that swift is no longer a neutral part of the financial
plumbing. In 2011 America leant on it to exclude Iranian banks by making various
threats, including that of sanctions on the network itself, says a former official close to
the talks. swift eventually complied. It also came under pressure to cut off Russian
banks after the invasion of Crimea in 2014. Although they remained connected,
America’s foes now know that relying on swift makes them vulnerable.

swift has gone some way towards placating its critics. It has bolstered its security
defences, and its international governance, it says, reinforces its neutral status. In
2017 it launched swift Global Payments Innovation (gpi), a network that allows banks
to process wholesale (ie, high-value) payments more quickly and to track transfers. It
now accounts for three-quarters of swift payments. Today 92% of these reach their
destinations in less than 24 hours. In July it launched swift Go, a similar service for
retail (low-value) payments.

All this may help neutralise the threat from fintech firms. Many do not
bypass swift entirely: they aggregate payments at one end and net them off against
transactions going the opposite way, so as to make just one, smaller cross-border
transfer, and then use fast local networks to channel the money. That means fewer
payments and less access to transaction data for swift. Ripple, a more radical
disrupter, evades the network altogether, and uses a cryptocurrency to facilitate
transactions.

Yet fintechs so far play a minuscule role in cross-border payments. Data crunched
by fxc Intelligence, a consultancy, for The Economist suggest that the share of cross-
border payments by value going through swift has remained broadly unchanged since
2019. The number of messages sent across the network has risen steadily. Ripple, by
contrast, has struggled to gain traction. Last year it settled just $2.4bn.
Instead the bigger threats to swift come from bigger beasts. Credit-card giants are
building the infrastructure to process retail “push” payments (those initiated by the
sender, rather than the receiver, as is usually the case with credit cards) that will run
largely parallel to swift. Both Visa and Mastercard, whose networks have over 15,000
member banks each, have bought startups that facilitate account-to-account transfers.
Facebook’s wallet could make cross-border payments cheaper.
Big banks are developing payment networks to serve wholesale clients. Earlier this
year JPMorgan Chase, which accounts for a quarter of dollar payments going
through swift, teamed up with dbs, a Singaporean bank, and Temasek, Singapore’s
sovereign-wealth fund, to launch Partior. This is a network that aims to get around the
flaws of correspondent banking by recording transfers on “permissioned” blockchain
ledgers, where only members can validate transactions. The network will allow for
instant, transparent and “programmable” payments (ie, the funds move only if certain
conditions are met).
Another threat is state-sponsored. Many central banks are developing their own digital
currencies (known as cbdcs). Over time these could allow banks to conduct overseas
transactions across a shared ledger, undercutting swift. America’s foes are building
new plumbing. In 2015 China launched its Cross Border Interbank System (cips),
which offers clearing and settlement for renminbi payments. The system, which
processed $7trn in 2020, uses swift as its main messaging channel, but has the tools to
become a rival.

swift has responded by schmoozing with central banks and running experiments of its
own, in the hope of securing a place at the heart of any cross-
border cbdc infrastructure. In February it also formed a tie-up with cips and China’s
central bank. And sheer force of habit could mean international finance continues to
be bound by its current nervous system, even if the institutional muscle and monetary
blood that compose it evolve, says Markos Zachariadis, the co-author of a book
on swift.

But it is also possible to imagine a scenario in which banks gravitate towards a new
platform. Most are not especially loyal to swift: America’s biggest banks feel they
have no voice, says an executive at one of them. Just two American lenders sit on its
board, only one of which—Citigroup—is a major bank. Meanwhile Partior, which
aims in time to host both central-bank and commercial-bank digital money, is in talks
to recruit core settlement banks for euro, renminbi and yen payments, says one of its
sponsors. China is touting cips’s messaging skills, says Eswar Prasad, a former
official at the imf. swift may not be in immediate danger, but the next decade is full of
uncertainty. An epic battle over how money travels is just beginning.